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Let’s assume that Citigroup really is in sufficiently bad shape that it cannot survive even after breaking up. Three rounds of government bailouts of the company are insufficient; the choices are either that the government buys up everything on Citi’s balance sheet that is at all problematic, or that the government seizes Citi itself – a true nationalization.

The problems with the former solution are well-known: the difficulty establishing a reasonable price for the assets in question; that fact that Citi shareholders benefit at the taxpayer’s expense; etc. The argument for nationalization is that it is clean and fair: equity investors are wiped out, the bank continues to operate, and the taxpayer gets all the upside (if any) once the assets are disposed of.

I don’t really disagree with that – if we look at Citi in a vacuum. But what if we look at it from the perspective of a Bank of America shareholder.

Once Citi is nationalized, its cost of borrowing plummets. To the extent that it continues to operate (and enabling it to continue to operate is the whole point of nationalizing it), it now has a competitive advantage over non-nationalized banks. Moreover, the assumption is that it will be re-privatized in short order minus its problematic assets – a neat trick that competing banks can’t pull off. That gives them a further competitive advantage. Finally, equity shareholders in other banks will have the precedent of the Citi nationalization staring them in the face as they contemplate their own investment. How sure are they that Bank of America, say, will make it if Citi didn’t?

The nationalization of Citi makes the failure of the next-weakest large bank vastly more likely for all of the above reasons. But if BofA fails, the effect on the next weakest bank is even more dramatic.

Moreover, the effect plays out internationally. Citi and BofA are global financial institutions. If they become arms of the U.S. government, what kind of pressures get brought to bear on UBS? And, given that UBS is too big for Switzerland to bail out, what happens then?

Basically, if you’re going to go down the path of nationalization, you’re going to go very far down that path. You’re not going to take over the “weakest” players. You’re going to take over all the large players. And that, more than fear of scare words like “Socialism,” is the real reason (I suspect) why the powers-that-be remain reluctant to embrace the nationalization solution flat-out, preferring instead to back into it in ways that will prove more costly to the taxpayer and less “fair” to the variety of stakeholders in our banking system.

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From the “things I think but can’t prove” file, I’ve always had this sneaking intuition that this country will end up in socialism not through revolution, or even through the ballot box, but because some corporate and moneyed interests will realize that the best thing for their profit and their growth is to become a part of the government.

Noah, let’s say that Citi goes under, and the government sits by, shrugs, and does nothing. What kind of effects will that have?

I’ve only gotten a vague sense of what that kind of firesale would do to global markets (including possibly triggering the wave of bank closings mentioned above), but I’d like a more educated guess on it.

A technical point, Freddie, but what you describe isn’t socialism; it’s corporatism. Or at least, your “moneyed interests” have nothing to gain from actual socialization (why private Venezuelan petroleum companies were so miffed at Chavez), so I assume you must mean corporatism.

That we are tilting towards corporatism seems fairly obvious. As Noah points out, corporatism creates weird incentives for big companies to fail, which doesn’t seem to be the way you want to organize your economic system.

I join with rorty in asking; what if Citibank were simply allowed to fail?

What about taking it over and then breaking it apart? But I see your main point—if the government does something to neutralize the toxic assets of any big bank, it will have to do the same with any other big bank.

Let’s consider what happens if nationalization DOESN’T occur: we can not simply continue bailouts and a “big bank” holding the toxic debt is not feasible for tax payers. I think we’re moving towards a system were the largest banks are nationalized and we have independent small regional banks.

JMHO.

This crisis is rewriting the financial landscape every day; I wouldn’t be surprised at the changes to come. Just as many wouldn’t have been able to picture the outcome of Mao’s China. People don’t care if the cat’s black or white; they want it to hunt. They want their financial system stabilized. And they want to be able to plan for the future.

Nationalization might be the most efficient way to get there; despite cries of socialism it has the virtue of punishing the ones who brought us to this place and keeping the tax payers whole.

I truly believe these banks should go under. No company is too big to fail.

We need them to fail to if we wish to keep out country free. Yes it will be painful, but that is life. There are plenty of regional midsize and small banks that will gladly take the place of the failing behemoths. My regional bank here in Houston and Dallas has know toxic debt and a clean balance sheet. They would gladly grow to other states and get bigger as the market opens up with others going down.

Not sure how nationalism has the virtue of “punishing the ones who brought us to this place,” since the shareholders, people who have index funds in their 401(k) accounts, etc., do not have anything to do with Fannie and Freddie buying every bad mortgage Citi or BofA could write. Also not sure how it “keeps the taxpayers whole,” except maybe on paper…if you nationalize it, which wipes out its share value, the only way the taxpayer is “whole” is if the government can run a bank as well or as poorly as…well…as a bank runs a bank. I’m thinking that the answer to that one is “no”

Corporatism is the Faustian bargain that draws business into the fascist model – private ownership, government control. With corporatism, businesses get some say in the authoritarian governance and can use political connections to get resources the government seizes from other economic actors. The latter can serve as a refuge for business folk in trouble or as a means to wound competitors, settle scores. Winners and losers are chosen, not by merit, but by means of who has the right political connections.

As for the taxpayers being made whole….if the banks survive (admittedly, IF…), the 8% coupon and return of TARP capital in several years is a pretty good deal. Very few other taxpayer expenditures return anything close to that.

“Not sure how nationalism has the virtue of “punishing the ones who brought us to this place,” since the shareholders, people who have index funds in their 401(k) accounts, etc., do not have anything to do with Fannie and Freddie buying every bad mortgage Citi or BofA could write. “

Stop with the GOP crap; Fannie and Freddie got to that party late, due to gov’t restrictions on what they could buy – they were unable to buy sub-primes for most of this bubble.

It came down to Wall St riding a bubble as far as they could, because the guys running things profited personally. They cashed in on shareholder equity and corporate reputation.